< “Doctrine of constructive notice in relation to company”>

Corporate Law Assignment

Submitted by

Name: Albert Joy Francis

Student ID: 201901736

B.A. LL.B. (6th Semester) (Regular)

Faculty of Law, Jamia Millia Islamia

Submitted to: Mr. Qazi. Usman, Professor (Faculty of Law, Jamia , New

Delhi)

(28.05.2022)

1
INTRODUCTION:
Section 610 of the Companies Act of 1956 provides for the inspection, production, and
proof of papers retained by the Registrar. It states that after the memorandum and
articles are registered with the Registrar of Companies, they become public documents
that can be seen by anybody for a small price.

As a result, anybody contemplating entering into a contract with the business has the
means of knowing and is thus expected to know the powers of the company and the
extent to which they have been delegated to the directors. In other words, every person
dealing with the company is presumed to have read these documents and understood
them in their true perspective. This is known as doctrine of constructive notice1.

In the eyes of the law, the Doctrine of Constructive Notice is the notion of presumption
of knowing of that particular subject or information. As we all know, a notice is an
alarm or a type of information that is delivered or informed to a person or group of
people. The notification is either served to the general public or to an individual

A company has separate legal entity which can be formed by an association of

individuals to with the intention to carry commercial activities to generate profit. The
formation and functioning of the company are governed by certain laws, rule and
regulations. The intention to behind the enactment of such laws is to provide protection
to company, its management as well as the outsider person who is contractually
engaging with the company2.

The memorandum of association and articles of association are two most important
documents needed for registration and incorporation of a company. The memorandum
of association of a company contains the fundamental conditions upon which alone the
company has been incorporated3.According to Section 2(28) of the Companies Act,
1956 defines the memorandum means the memorandum of association of a company as
originally framed or as altered from time to time in pursuance of any previous
companies’ law or of this Act. According to Palmer, the memorandum of association is
a document of great importance in relation to the proposed company4.

It contains the objects for which the company is formed and therefore identifies the
possible scope of its operation scope of its operation beyond which its action cannot
go.

1
<https://www.lawteacher.net/free-law-essays/business-law/doctrine-of-constructive-notice-business-law-essay.php?
vref=1> accessed 27 May 2022
2
Rajak, A Sourcebook of Company Law. 2nd edn, Jordans. 1996.
3
2014. A Ramaiya Guide to The Companies Act, 18th ed. New Delhi: LexisNexis, p.1154.
4
https://indiankanoon.org/doc/995988/
2
 BRIEF ANALYSIS OF DOCTRINE OF CONSTRUCTIVE NOTICE:

Constructive Notice is one of the most important ideas we meet when studying
Company Law. Because the AOA of the Firm are a public document and are accessible
to everyone u/s 399 of the Companies Act, 2013, the theory of Constructive Notice
means that the AOA are well-known by an outsider who desires to hold any
relationship with the company in the near future5.

The AOA and MOA are considered "public papers" from the time the business is
registered. They are open to the public for inspection. As a result, it is presumed that
everyone who interacts with the organization is well-versed in its rules and regulations.
This is known as the Doctrine of Constructive Notice.

The legislation of constructive notice applies not only to MOA and AOA, but also to
any other papers required to be filed with the Registrar of Companies, such as special
resolutions mentioned in Section 1176. However, the idea of constructive notice does
not apply to papers filed with the registrar of businesses only for record-keeping
purposes.

In other words, if a person enters into a contract that exceeds a firm's authority, he has
no right to sue the company under the contract. The powers of the firm are defined in
the Memorandum of Association. Furthermore, if the contract exceeds the directors'
power as stipulated in the Articles, the individual has no rights.

This approach decreases complicity in the business's rules and regulations. This
Doctrine protects the corporation while dealing with an outsider. There is no exact
definition of the Doctrine of Constructive Notice, however it may be summarized as
follows. A business is a public body, and its records, such as its Memorandum of
Association and Articles of Association, are available for public examination. As a
result, it is expected that the outsider who is doing business with the corporation has
read these documents. Outsiders have a responsibility to be aware of the company's
rules and regulations since they are public record.

Palmer claims7 that the idea only applies to papers that affect the company's rights.
Constructive responsibility seeks to simplify corporate regulations. It protects
organizations when they interact with outsiders. Nonetheless, this rule was seen as
doing more harm than good, undermining its credibility. To limit the use of this
provision where the rule in dispute is internal, the courts created the notion of indoor
management. This English notion was originally applied only in cases of fraud, but it
rapidly spread to cases of severe carelessness as well.

5
Fraser. 'The Corporation as a Body Politic' (1983) Telos. no. 57, 5.
6
According to the Companies Act, 2013 Section 299.
7
, B., 2012. Company law. 3rd ed. Oxford: Oxford University Press.
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 DIFFERENCE BETWEEN CONSRUCTIVE NOTICE AND ACTUAL
NOTICE:
According to the notion of notice is based on knowledge of a truth. Knowledge in this
context does not mean perfect certainty, but rather a belief in the reality of the truth in
issue that would cause a reasonable and wise person to act in everyday life. This
information may be owned by a person or may be attributed to him by law. The notion
of notice requires either knowledge of a truth or proof that under the given
circumstances, one must have had knowledge of that fact. It is important to remember,
however, that knowledge is not equivalent with attention. There can be a notice
without express knowledge of the fact, and there can be instances in which knowledge
of the fact does not equal notice.

Thus, notification might be defined as the legal recognition of a fact 8. The notion of
notice is crucial under the Transfer of Property Act of 1882 to assess the claims of two
or more parties (against each other) who are involved in an unconscionable transaction.
Actual notice is when a party genuinely possesses knowledge of a fact, whereas
constructive notice is when knowledge of a truth is not expressly disclosed but can be
attributed to the party under specific conditions.

 ACTUAL NOTICE9:
A direct or express knowledge or hint of a fact to a person is considered to
constitute an actual notice of the fact to that person. Actual notice is the verbal
or formal notification of a concrete fact pertinent to the transaction to one party
by another party interested in the transaction.
An actual notification is stated to be binding on a person only when the
following procedural requirements are met:
It should be true knowledge, not hearsay or rumor.
1.1.1.1. The notification must be of such a kind that reasonable people are
expected to take it seriously. It must be the product of official
communication rather than a casual dialogue between persons.
1.1.1.2. It is a recognized rule that a person is not compelled to attend to
vague rumors or remarks by mere strangers, and for a notification to be
obligatory, it must come from some individuals engaged in the
transaction.
1.1.1.3. Knowledge that is relevant to the transaction must be specific to
the transfer in issue and not broad or unrelated to the transaction.
Furthermore, the notice must pertain to the same transaction, as any
information transmitted as part of another transaction may be
forgotten, and the notice theory, which is founded on justice, does not
permit this.

8
Bispham, Principles of equity, p 263
9
https://muds.co.in/constructive-notice-doctrine-companies-act-2013 (last accessed on May 26, 2022)
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  CONSTRUCTIVE NOTICE:
To begin, let us define constructive notice. Constructive notice is implicit or
indirect notice that is not received in actuality but is served in the eyes of the
law. That is, the law imposes duties, and it is assumed that you are aware of
that fact. Or the notice has been served on you. AIRTEL, for example.
When you log on to Airtel's website, every information regarding the
Memorandum, Articles, or Certificate of Incorporation is clearly stated, and
anybody interested in doing business with the firm should study all of the
particulars.
If a problem emerges after dealing with the firm, you cannot claim that you
were not informed beforehand. It is the responsibility of the outsider to study
the memorandum or articles of the company with which you are dealing.
Constructive Notice and Actual Notice are commonly used interchangeably.
Even though a person does not have real notice, he may have constructive
notice. Actual notice occurs when a person becomes aware of an occurrence
or a topic for the first time. Constructive notice, on the other hand,
establishes legal notice despite the fact that no actual notice was ever issued.
However, given the circumstances, the individual should be able to fairly
understand the procedure. For example, we commonly see legal notices
published in newspapers, etc.
In Oak bank Oil Co. v. Crum10:
It was ruled that everyone who engages with the corporation is believed to have
not only read its MOA and AOA, but also fully comprehended the true meaning
of the articles. This type of notice is known as Constructive Notice.

CHARACTERISTICS OF CONSTRUCTIVE NOTICE:

 Constructive Notice, sometimes known as legal fiction, happens when courts

assume interested parties have knowledge they do not actually have.

 When service on an interested party has become difficult due to the party either
ignoring the process server at his door or being unable to be recognized when
service is attempted, this notice is commonly utilized.

 Constructive notice is deemed preferable to actual notice under the constructive

notice, the person who was duly served and received the constructive notice but
did not receive a physical copy of the summons and associated paperwork
owing to some other cause would be unable to dismiss the case on the basis of
failure of service.

DOCTRINE OF INDOOR MANAGEMENT:

10
(1882) 8 A.C. 65
5
 The Doctrine of Indoor Management is diametrically opposed to the Doctrine of
Constructive Notice. The former protects the outsider person from the firm's unlawful
conduct, whereas the latter protects the company from the outer person's illegal actions.
The constructive concept extends to the operation that no real notification is required.

In the matter of Kotla Venkataswamy vs. Rammurthy11:

The Madras High Court questioned the scope of the idea of constructive
responsibility in Kotla Venkataswamy vs. Rammurthy, AIR 1934 Mad 579. The
question in this case was whether the mortgage bonds were lawfully issued in
compliance with the company's AOA, which would hold the firm liable. Article
15 of the Company's AOA says that all deeds, hundies, checks, certificates, and
other papers must be signed on behalf of the Company by the Managing
Director, Secretary, and Working Director.

The Indoor Management Doctrine establishes the notion that people entering
into contracts with the firm cannot be compelled to have knowledge of the
company's internal working and procedure in regard to the contract. The Indoor
Management theory is an exception to the rule set by the Doctrine of
constructive notice. This indoor management ideology is based on the idea that
the individual entering into the contract with the firm is acting in good faith and
will not be harmed by the company's unlawful conduct.

THIS DOCTRINE'S OBJECTIVES12– Business is an area that requires the

protection of all contractual parties, and outstanding business can only secure
economic and trade growth. Though this concept appears to be for the protection
of those doing business with the firm, its primary goal is to stimulate corporate
investment in order to keep the business and the economy functioning
efficiently.

As a result, if an act is permitted by the Memorandum or Articles of

Association, an outsider might presume that all precise procedures are followed
in carrying out the act. This is known as the Turquand Rule or the Indoor
Management Doctrine. This is based on the historic case involving The Royal
British Bank and Turquand13. Simply put, the philosophy of interior
management states that a company's indoor activities are its responsibility.

As a result, this indoor management guideline is critical for people working with
11
AIR 1934 Mad 579
12
http://indiacorplaw.blogspot.in/2010/06/ostensible-authority-and-indoor.html
13
(1856) 6 E&B 327
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 a firm through its directors or other individuals. They can presume that the
company's members are acting within the boundaries of their apparent power.
As a result, if a lawful act under the Articles is performed in a certain manner,
an outsider dealing with the firm might conclude that the director/other officers
acted within their jurisdiction.

The Courts in India have also been reluctant in applying the doctrine of
constructive liability. The Allahabad High Court in Dehradun Mussoorie
Electric Tramway Co. Jagamanandaradas case14 rejected the doctrine of
constructive liability and the Company was held liable to the party to the
transaction even the directors of the company borrowed the money which was
neither in compliance with the articles nor it was done after obtaining the
resolution in the general body.

The rule of constructive notice has proven too cumbersome for corporate
transactions, particularly when the company's directors or other officials were
permitted by the articles to use specific powers subject only to certain previous
approvals or punishments from the shareholders. It was impossible to determine
whether those sanctions and approvals had been obtained or not because, in
reality, investors, vendors, creditors, and other outsiders would not dare to
question the directors in such detail about whether those sanctions had been
obtained or to produce the relevant resolutions.

Because there is no way to determine whether the necessary sanctions and

approvals have been obtained before a particular officer exercises his powers,
which, according to the articles, can only be exercised subject to certain
approvals, those dealing with the company can assume that if the directors or
other officers are entering into those transactions, they have obtained the
necessary sanctions.

If such an irregularity develops as a result of the business's activity, the firm is

liable since the outsider acted in good faith. Because it is expected that the outer
person is familiar with the MOA and AOA, it is also presumed that the
corporation has performed internal compliance. It is the company's obligation to
comply with all of the conditions outlined in the MOA and AOA; an outsider
cannot be obligated to investigate the company's internal affairs.

EFFECTS OF DOCTRINE OF CONSTRUCTIVE NOTICE:

14
AIR 1932 All. 141
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 It is the outsider, according to the Constructive Notice concept. It is in charge of
knowing the documents that regulate the firm. Before entering into any agreement with
the company, he should be well-versed in all legal documents. It is also the third party's
obligation to understand the true meaning of the provision and conditions included
therein. Corporate bodies are desirable, according to the theory15.

The court had also developed a doctrine subsequently and held that although the third
party should have notice of all the contents of the Memorandum and Article, they are
not required to inspect the internal matters and see whether the company had complied
with all the internal procedure16.

In the case of Kotla Venkataswamy vs. Rammurthy, AIR 1934 Mad 579, the Madras
High Court debated the scope of constructive responsibility. The challenge in this case
was whether the mortgage bonds were issued properly in accordance with the
company's AOA, making the corporation accountable. According to Article 15 of the
Company's AOA, all deeds, cheques, certificates, and other paperwork must be signed
on behalf of the Company by the Managing Director, Secretary, and Working Director
before they are regarded as legal.

In this instance, the plaintiff accepted a mortgage deed signed by merely the secretary
and an executive director. The plaintiff cannot file a claim under this deed, according
to the court. According to the Court, if the plaintiff had read the articles, they would
have noticed that a deed to carry out the task needed by the firm's three authorized
officials was poorly signed, and they would not have accepted such a deed.

CONNECTION OF DOCTRINE OF CONSTRUCTIVE NOTICE

WITH COMPANY:

When we talk about the public papers, which are the Memorandum of
Association and the Articles of Association, it is assumed that the
individual dealing with the firm has complete information or has read the
public documents. Anyone interested in doing business with the firm
should review the company's public records to better understand the
company's restrictions and downsides. That is, to know if the directors will
contract or not, and to what degree they may contract.

All of this is stated in the company's memorandum or articles. If you are

15
Avatar Singh, company law (47&77) ( Eastern Book Company, Lucknow, 16th edn)
16
Avatar Singh, company law (90) ( Eastern Book Company, Lucknow, 16th edn)
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 doing business with a corporation and have not read the memorandum or
articles. Then it will be deemed your responsibility because it is assumed
that you have read all of the material in the memorandum and articles and
you cannot dispute why you were not notified earlier or informed. The law
will assume that you have read it all since reading the public document is
the first thing a person should do before interacting with a certain
organization17.

Memorandum of Association18 which is defined under section 2(56) & section 4 of the
companies Act ,2013, it is an important step in the formation of the company, it contains
the following fundamental clauses which is described as the conditions of the company’s
incorporation.

· Name Clause

· Registered Office Clause

· Objects Clause

· Liability Clause

· Capital Clause

Articles of Association which is defined under section 2(5) & section 5 of the companies
Act, 2013, it is the second document which has to be registered along with
memorandum. Articles are the internal regulation and bye-laws. Articles are to contain
regulations for management of the company.

17
All about Principle of Lifting of Corporate Veil under Companies Act, 2013,
https://taxguru.in/company-law/doctrine-constructive-notice-indoor-management.html (Last accessed on May 28,
2022)
18
https://aishwaryasandeep.com/2021/10/16/doctrine-of-constructive-notice-2/ (last accessed on May 28, 2022)
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CONCLUSION:
The rule of constructive responsibility is an impractical notion. It is a fictitious theory
manufactured by judicial pronouncements of the Courts. In the course of the company's day-
to-day operations, several parties engage into a variety of contracts. This ideology requires
every outsider not only to know the company's records but also to grasp the specific
substance of those documents, which is practically impossible.

In actuality, the corporation is identified not by the paperwork but by the people who
represent it and engage with outsiders. Outsiders conduct business and engage into contracts
not usually on the basis of the company's paperwork, but on the goodwill and reputation of
the directors or officers who represent the firm.

A constructive notice is founded on a legal assumption, and such presumptions are not
rebuttable. Once the presumption is created based on the existence of the conditions needed
for assuming a notice of the fact, it is a constructive notice, and the assumption is
unrebuttably in law. Whereas an actual notice is definitive knowledge, because there is no
assumption, there is no issue of rebuttal of a presumption. Equity considers that which should
be done to be completed. The Notice Notion is an equitable doctrine. In other words, it
assures that neither party to a transfer is treated unfairly.

This is why the British and Indian courts have changed their approach to dealing with issues
involving outsiders to the firm. This theory has received little weight in Indian courts. The
European Communities Act also abolished the idea of constructive notice by including
Section 9 of the Act, which acknowledges the concept of good faith in economic transactions.
This section reflects the reality of commercial transactions, in which outsiders of the
company enter into numerous contracts not on the basis of the company's documentation, but
on the basis of the firm's good faith. In essence, the Doctrine of notice is to property law what
essential structure is to the constitution.

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BIBLIOGRAPHY:
 <https://www.lawteacher.net/free-law-essays/business-law/doctrine-of-constructive-
notice-business-law-essay.php?vref=1> accessed 27 May 2022
 Rajak, A Sourcebook of Company Law. 2nd edn, Jordans. 1996.
 2014.  A Ramaiya Guide to The Companies Act, 18th ed. New Delhi: LexisNexis,
p.1154.
 https://indiankanoon.org/doc/995988/
 Fraser. 'The Corporation as a Body Politic' (1983) Telos. no. 57, 5.
 According to the Companies Act, 2013 Section 299.
 , B., 2012. Company law. 3rd ed. Oxford: Oxford University Press.
 Bispham, Principles of equity, p 263
 https://muds.co.in/constructive-notice-doctrine-companies-act-2013 (last accessed on
May 26, 2022)
 (1882) 8 A.C. 65
 AIR 1934 Mad 579
 http://indiacorplaw.blogspot.in/2010/06/ostensible-authority-and-indoor.html
 (1856) 6 E&B 327
 AIR 1932 All. 141
 Avatar Singh, company law (47&77) ( Eastern Book Company, Lucknow, 16th edn)
 Avatar Singh, company law (90) ( Eastern Book Company, Lucknow, 16th edn)
 All about Principle of Lifting of Corporate Veil under Companies Act, 2013,
https://taxguru.in/company-law/doctrine-constructive-notice-indoor-management.html
(Last accessed on May 28, 2022)
 https://aishwaryasandeep.com/2021/10/16/doctrine-of-constructive-notice-2/ (last
accessed on May 28, 2022)

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